The year in review has been a little hectic, seemingly unpredictable, and laden with threats and opportunities. We have done our best to keep our finger on the pulse of this wild year, and have come up with a few predictions for 2019. Amidst trade wars, government regulations, capacity shortage, and increasingly volatile markets, the logistics industry has changed faces many times and when accounting for more technological revolutions it seems that the lifeblood of the economy will continue to shift and adapt in the coming year. Let’s take a look at what next year might offer us.
Driver Shortage and Capacity Utilization
Any company that exists within the industry knows of the buzz around the unprecedented driver shortage that we are experiencing. To put this shortage into perspective, in the sixteen years between 2000 and 2016, import/export traffic has doubled according to data aggregation from World Bank. This traffic is continually trending upward and shows no immediate signs of slowing down, much less declining. This is a good thing for the logistics industry and the economy as a whole, but it presents a challenging problem: the aforementioned driver shortage. Despite the growth in the industry, the number of qualified drivers is actually decreasing. The biggest reason for this continual decline seems to be a matter of demographics in the driver market. According to the Bureau of Labor Statistics, “the average age of a trucker in the U.S. is 55.” These truckers will likely want to retire within a matter of only two decades, and it seems that younger members of the labor force are opting out of driving positions to follow more lucrative opportunities in industrial markets, particularly oil.
There are a few options to mitigate this growing issue (an issue that often results in delivery delays and service failures) but surprisingly the most feasible option seems to be investment in driver-less automobile technology. With a market as tight as it is, wage increases and other monetary incentives are hard to pull off without creating a snowball of increasing rates. On average, “every dollar in a shipper’s rate, between 30 to 50 cents go to the drivers.” Raising driver pay will see a relative increase in shipping rates that will cascade across the industry. The other option is investment in these driver-less vehicles. Because of this, it is likely that the industry will see an implementation of this technology within the next three years, with larger players (such as FedEx, UPS, and Amazon) implementing this technology even sooner.
More Rate Changes
Another industry driver that is host to many simultaneous influences are the rates that we see for supply chain moves. These rates are comprised of spot rates and contract rates, and fortunately for the industry, experts believe we will see a gradual decline in both segments.
After a rate peak after Q4, analysts at Logistics Management Magazine predict a gradual decline in FTL/LTL and air rate growth. While it seems that rates will not exactly be declining for some time, the rate at which they are growing is seeing a fast stop by year-end 2018 and will continue to decline in growth throughout 2019. On average, LTL and FTL rates should peak at about 3.6% growth in early 2019 and begin to decline steadily thereafter. Compared to an overall growth rate in 2018 at about 6.3%, this spells future rate decline for the industry.
While we expect a decline in rates for both trucking and air, rail and sea (water) rates see no conclusive signs of dropping. Water transportation shows that growth will stagnate slightly by year-end 2018, but will only decline in growth by about 0.4% in 2019. Rail freight is the major outlier in these analyses and is showing steady growth for the foreseeable future, especially looking at carload prices. It is expected that carload prices will continue to grow in 2019, and show no signs of an inflection point in the near future.
From a viewpoint of the economy at large, this could lead to costly decisions if interest continues to rise as a result of increasing national debt and ongoing trade relation problems with China.
Experts suggest that the best way to handle this issue is to scale up asset utilization and to invest in technological advancements that could help introduce demand to capacity. Such technological uses as preventative analytics software and Artificial Intelligence freight matching could grow utilization upwards of 94% (the industry average as it stands now).
The Amazon Effect, Technological Shifts, and Consolidation
We would be remiss to talk about a freight forecast if we didn’t mention an important influence on the industry. This influence is something that industry experts have coined, “The Amazon Effect.” Amazon has certainly been a revolutionary force in shipping (not to mention retail, cloud computing, etc.) Overall, the changes that they have ignited are a positive force for the economy, for the consumer, and for the shipping industry. However, those changes don’t come without their issues: Namely, heightened consumer expectations.
C. John Langley, Clinical Professor of Supply Chain Management, summarizes this effect best: “Next week is no longer good enough. It’s got to be on its way now and arrive at destination within a day or two!” Most end users are not aware of the lengthy process and pinpoint accuracy that it takes to get their goods to them, but that doesn’t matter. Traditionally (when the goods could arrive to the end user by the end of the next week) loads only saw three or four touches between network partners before the end user ever had their hands on it. However, by shortening the acceptable timeline of goods shipment, most loads require eight or nine touches, often with moves between multiple warehouses and forward positions. The “final mile” is continually evolving and being redefined, requiring more players in the market to move one set of goods. This, of course, results in higher chances for damaged freight, freight misplacement, delay, and a plethora of other service failures.
This effect has been playing on the market for a few years now, but it seems that logistics is finally evolving to meet these issues head on through technological advancements, and we are likely to see those changes being implemented on a large scale in 2019.
What are the new technologies that we will be seeing in 2019 that will answer all of these issues? Big Data and Blockchain.
Blockchain should see its first major adoption in 2019 with many companies joining the BiTA Alliance, one of the biggest Blockchain adoption efforts in the industry. If you haven’t heard the ubiquitous good news of Blockchain at this point, it is essentially a technological shift in the way that we track information and improve visibility in the supply chain (as well as other segments of industry). We wrote an article on it a few months ago that really digs into what Blockchain is, and we encourage you to take a look at it to learn more.
Despite these hopeful predictions and the growing number of early adopters, this technology is not without its critics. There could be a slowing of adoption in 2019 due to what experts have said about how the industry is “inherently averse to change.” Blockchain works best if the entirety of your supply chain is encoded in its technology – that is, if everyone along the forward and backward paths in your supply chain is also using it. Because this industry is slow to make change, especially change that is as large-scale as Blockchain, we could see more problems and service failures in 2019 before we see improvements in freight moves.
A final trend that will influence the market in 2019 is the increased developments in consolidation of major shipping companies. To put it into perspective, in 2019 there will be less than 10 major players in global shipping with three giants (2M, Ocean Alliance, and THE Alliance) taking the top three positions. Between just these three major alliances, they control 11 shipping lines leaving other shippers with few shipping carrier options and reduction in industry competition over time. While this allows for higher quality customer service and increased capacity due to better communication between partners, it is likely that further consolidation efforts in 2019 will lead to higher rates snowballing down the supply chain as an effect of this decreased competition.
This leaves smaller carriers and shipping outfits with really only two options: consolidate or get left in the dust. Of course, these smaller outfits could potentially leverage the use of technology to help them remain competitive, but we will likely see more exits in the industry in 2019.